week 8 equilibrium and welfare Flashcards
partial equilibrium
Partial is useful for isolating specific effects, looking at a specialised world
General equilibrium
General is useful to pick up indirect effects of things, necessary to get a complete picture.
-Accurate reflection
examples of partial and general equilibrium
Price of apples increases, look at consumer you think they’re worse off. (partial), if the consumer also grows and sells apples. Fruit is worth more so has high PP than buy more goods. Thus better off. (general)
edgeworth box
The set of feasible pairs of consumption bundles
price in pure exchange economy
Relative scarcity of the good in the economy’s endowments
Relative preference for the good in the economy, if really like something more price is higher even if same supply of two goods
Consumers in this economy only care about purchasing power of their endowment, not the price.
Pareto criterion
Outcome 1 is Pareto improvement on outcome 2 if…
No one is worse off in 1 than 2 and at least one person is strictly better off in 1 than 2
First Welfare theorm
market equilibrium Is pareto efficient
Equilibrium-
* consumers see prices and choose consumption amounts
* Equilibrium s=d
* Equilibrium also MRSa=MRSb
Efficiency
Characterised by the indifference curves being tangent- MRSa =MRSb. Impossibility of making one person better off without making someone else worse off
but less utility
Second welfare theorm
- Any Pareto efficient outcome is attainable as a market equilibrium using lump-sum redistribution.
Lump sum policy
Lump sum policy Is where the consumers behavior can’t change tax or subsidy. (The amount)
Difficult in practice i.e. income tax, work less hours. Commodity tax, change consumption pattern e.g. eat less chocolates.
difficulty of lump sum redistribution
Difficult in practice i.e. income tax, work less hours. Commodity tax, change consumption pattern e.g. eat less chocolates.
More Problems with Paerto criterion
Good how it avoid interpersonal comparisons, also makes it bad welfare criterion
Means has incompleteness and indecisiveness
Doesn’t rank all options
e.g ask a Paretion 1 or 2 and ask which is preferable
Answer- is both is pareto efficient- cant rank either
Doesn’t help policy maker
doesn’t concern equity
social welfare function
A tool to capture distributive preferences of a social planner or dictator
A reflection of some ethical objective society should purse e.g. caring about children or educational benefits
An aggregation of individual preferences
utilitarian social welfare function
Greatest good for the greatest number, maximise the sum of utilities
W= Ua+Ub
No equity concern
Rawlsian
Only the worst off is society matters, doesn’t matter about the others
W= min(Ua,Ub)
Very strong equity concern
